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Mortgage servicing errors highlight need for

Peter Swire's Bethesda, Md., home isn't in a flood plain. But that didn't stop the company that administers his mortgage from buying flood insurance on the place without his knowledge.

Worse, perhaps, Swire didn't find out about it until he was dunned for a $200 late fee when he received his next automatic payment notice.

It took him "several months" and about 50 phone calls to rectify the problem. But then it happened again — and again. "At one point," he said, "I had three different flood-insurance policies in place that I didn't need. Each time the problem was resolved, the whole cycle started over again."

That's when Swire, a former Obama administration official who is now a law professor at Ohio State University, became "a crusader."

"The transmission belt that carries payments from borrowers to investors who own mortgages has failed all major stakeholders," he said at the Midwinter Housing Finance Conference in Park City, Utah, last month. But it is particularly onerous for consumers because they have no recourse.

"Homeowners need some market or legal check against mistakes and abuses" by loan servicers, said Swire, who left theWhite Housein August after serving for 18 months as special assistant to the president for economic policy. "I'm not saying servicers don't care. The point is, there is a lack of incentives for servicers to care."

The servicing sector, 80% of which is now controlled by just five companies, has come under heavy fire of late for numerous abuses of the foreclosure process. Not only were they ill-equipped to handle the flood of defaults; the servicers rushed to repossess houses where their investor-clients were unable to prove they actually owned the mortgage.

But what happened to Swire — and the problems encountered by thousands of other borrowers — shows that issues with mortgage servicing run much deeper. Among other things, servicers can lose payments, credit payments to the wrong accounts, mess up escrow accounts and fail to pay borrowers' property taxes and hazard-insurance premiums in a timely manner. Sometimes they don't make the payments at all.

To be fair, these companies handle tens of millions of payments every month, so there is bound to be a miscue here and there. But don't tell that to borrowers who spend hours on the phone practically begging to get errors corrected.

Because of the issues with foreclosures, federal banking regulators are in the process of finalizing a series of rules that "will comprehensively address servicers' deficiencies," acting Comptroller of the Currency John Walsh told the Senate Banking Committee a week after Swire's discussion in Utah.

The new requirements "will hold servicers to standards that require effective and proactive risk management … and appropriate remediation for customers who have been financially harmed by defects in servicers' standards and procedures," Walsh said. Details are still under wraps.

Stressing that he is speaking for himself and not the administration, Swire said he thinks that what's needed is a servicing law akin to the Fair Credit Reporting Act, the 1970 law that gave individuals the right to see their credit histories and correct mistakes.

Over time, Congress strengthened that law's consumer protections. But the law does not apply to mortgage-servicing companies, even though the recent history of mortgage servicing parallels that of credit reporting in the 1960s, said Swire, who also is a senior fellow at the Center for American Progress, a progressive think tank.

Back then, the credit-reporting business underwent tremendous consolidation. And when consumers discovered serious mistakes in their records, there were no solid procedures in place to handle the complaints.

Sound familiar? It should. The same problems now plague the servicing business — great consolidation and no process in place to complain. Worse, borrowers are nothing more than third-party bystanders to a contract between the servicer and the owner of the mortgage.

About the only effective remedy for someone who is dissatisfied with the company that manages his or her mortgage is to refinance. But with just five firms handling the bulk of the business, there's a good chance you'll end up right back with the same outfit. Besides, in the eyes of most borrowers, Swire said, there is "little differentiation" between servicers.

The former White House official said he's not on a campaign to reform the system. But he authored a paper at the Center for American Progress in January about the "deep flaws" in the ways mortgage payments are handled. And last month at the Utah conference, he suggested that fixing the process could be a "down payment" for broader reforms in the overall housing-finance system.

"We're at a moment in history where the system seems entirely accidental," he said, noting that no one in the payment chain is satisfied with the way things are now — not even servicers.

In fact, Swire said the companies with which he has spoken "are at least open to change." They haven't said so publicly as yet, he noted. But there is "quiet acceptance" of the need for national standards, "if only to get out of the crossfire" in which they now find themselves between consumers, investors, regulators and lawmakers.

Specialty servicer Amy Brandt of Vantium Capital, a firm set up specifically to handle delinquent mortgages, would welcome federal action. Never did Brandt ever think she would say that. But "for once," she said at the Utah meeting, "I'd like the federal government to get involved."

Swire would like to see a substantive bill of rights for homeowners that includes a single point of contact for borrowers, better disclosures of fees, penalties if servicers engage in a pattern or practice of errors, and better procedures to help owners who are experiencing difficulty making their payments.

He would also like to see a few procedural requirements, such as mediation before foreclosure, or perhaps even arbitration, and a law similar to the Fair Credit Reporting Act that allows for private lawsuits by aggrieved borrowers.

The current system is "so unfair and inefficient" that whatever happens next, Swire believes the status quo can't be allowed to continue.

"I had the good luck to be a law professor who was able to eventually get to a senior manager to resolve my problem," he said. "But it was still difficult for me to fix the problem. And if it was difficult for me, think how hard it is for the average borrower."